TaxTMI 
TaxTMI 
2019 (9) TMI 784
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....xpenses Rs. 10,77,994/- 3. Liquidated damages Rs. 3,67,02,426/- 4. Depreciation Rs. 2,82,62,389/- 5. Disallowance u/s.14A Rs. 75,00,500/- 6. Provision for warranty Rs,2,39,35,670/- 7. Legal and professional expenses paid to Mckinsey & Company Rs. 9,02,00,000/- 8. Commission paid on Sales Rs. 13,45,000/- 9. Adhoc disallowances in respect of vehicle expenses, telephone expenses, miscellaneous foreign travel expenses, public relation expenses 3. Aggrieved against the assessment order dated 30.12.2008, the assessee filed appeal before the Commissioner of Income Tax(Appeals). In First Appellate Proceedings, the Commissioner of Income Tax(Appeals) granted part relief to the assessee by deleting some of the additions in full. In the case of some of the disallowances/ additions, the Commissioner of Income Tax (Appeals) gave partial relief. 4. Against the findings of the Commissioner of Income Tax (Appeals), both, assessee and the Revenue are in appeal before the Tribunal. For the sake of convenience, we would first take the appeal of the assessee. ITA No.1033/PUN/2013 ( By Assessee) A.Y. 2005-06 5. The assessee has impugned the findings of the Commissio....
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.... 6. Provision for warranty : On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in sustaining disallowance under this head to the extent of Rs. 59,83,918/- being 25% of warranty provision rejecting the contention of the Appellant that the provision made by the Appellant was on a consistent and sensible basis and was allowable as such. The disallowance sustained by the learned CIT(A) be deleted. 7. Legal and Professional Expenses- fees paid to Mckinsey & Company : On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in treating the fees paid to Mckinsey & Company as deferred revenue expenditure and allowing deduction there for only to the extent of 1/5th thereof and the balance over the next four years rejecting the contention of the Appellant that the whole of the expenditure was allowable in the year of incurrence thereof. The disallowance sustained by the learned CIT(A) to the extent of Rs. 7,21,60,000/-. Your applicant reserves the right to add to, amend or delete the above grounds of appeal." 6. Shri H.P Mahajani appearing on behalf of the assessee submitted at the outset that majority of....
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....elating to assessee's claim on depreciation @80% on plant & machinery used in manufacture of air/gas/fluid heating systems being renewable energy devices. The ld. AR submitted that the assessee is manufacturing renewable energy devices. According to Appendix-I of Income Tax Rules, 1962, plant and machinery used in the manufacture of renewable energy device is eligible for deduction @80%. This issue was raised for the first time in assessment year 1998-99. The same was decided in favour of the assessee holding that air/gas/fluid heating systems were renewable energy devices and the plant and machinery need to be exclusively used for the manufacture thereof. Only additions to machinery & plant exclusively used in the manufacture of heat pumps were held not eligible for higher rate of depreciation. Similar disallowance of depreciation was made in assessment year 2004-05. The Tribunal following its earlier decision on the issue granted relief to the assessee. 6.5 In respect of ground No.5 of appeal relating to disallowance u/s.14A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'), the ld. AR submitted that the assessee has earned dividend income of Rs. 9.78 Crores. T....
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....d. DR submitted that the Revenue in cross appeal has raised grounds corresponding to grounds No.1, 2, 5, 7 and 8 of the appeal by assessee. The ld. DR fairly admitted that all the issues raised in the appeal by assessee, except payment of legal and professional fees to Mckinsey & Company, have been considered by the Tribunal in immediately preceding assessment year in assessee's own case. 7.1 In respect of ground No.8, the ld. DR submitted that the assessee has claimed expenditure to the tune of Rs. 9.02 Crores towards payment of fees to Mckinsey & Company. The Assessing Officer after considering the fact that the assessee has got advantage in the form of improvement in profit making apparatus of the company, disallowed assessee's claim of expenditure as revenue and held the same to be on capital account. To come to such conclusion the Assessing Officer relied on Delhi Tribunal - Special Bench decision in the case of Amway India Enterprises, SQL Star International Limited Vs. DCIT reported as 111 ITD 112. In First Appellate Proceedings, the Commissioner of Income Tax (Appeals) reversed the findings of the Assessing Officer in holding the expenditure as capital. However, the Ld. C....
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....duled payments agreed with the clients but at the same time had created provision towards "Contribution Equalization Provision" to adjust excess billing. During the year, the provision of contribution equalization debited to the Profit and Loss account was Rs. 4,53,93,679/-. AO noticed that the excess amount realized as per the invoices was not offered as revenue receipts and to that extent profit was not offered as income. AO was of the view that since the invoices was raised as per the agreed schedule; the invoice value should be treated as revenue receipts. He further noticed that identical issue arose in A.Y. 1997-98 wherein it was held that the value reflected in invoices raised as per agreed schedule with the clients was to be treated as revenue receipts. AO therefore held that the provision of Rs. 4,53,93,679/- cannot be allowed. He accordingly disallowed the same and made its addition. Aggrieved by the order of AO, assessee carried the matter before CIT(A), who granted partial relief to the Assessee by holding as under : "7.2. I find that the issue has elaborately been dealt with by my predecessor in appellant's case in appeal for A.Y. 2002-03, wherein it was held by him....
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....1997-98 to 2000-01, by holding as under: "18. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to increasing the income to the extent of provision for profit equalization. We find that identical issue of increase in the contract income arose in assessee's own case in A.Y.2000-01 and 2001-02 and the coordinate Bench of the Tribunal decided the issue in assessee's favour by following the Tribunal order for A.Yrs. 1997-98, 1998-99 and 1999-2000, by holding as under: 9. The third ground raised by the assessee in appeal relates to income recognition from contract in accordance with Accounting Standard 7 of the Institute of Chartered Accountants of India (ICAI). The Revenue in cross appeal for assessment year 2000-01 has also raised this issue as ground No.1. The assessee is manufacturing boilers and heat transfer equipments on contract basis. These contracts are spread over a period of more than one year. The assessee is recognizing income of the projects, on project completion method. The assessee raises invoice on the client as per schedule of payments. The bills raised are always more than the revenue that s....
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.... its appeal is dismissed. 19. Before us, since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years and since in earlier years, the issue has been decided by Co-ordinate Bench of the Tribunal in assessee's favour, we therefore following the decision of the coordinate Bench of the Tribunal in assessee's own case for earlier years and for similar reasons, allow the ground of assessee and thus, the assessee's ground No.4 is allowed and Revenue's ground No.2 is dismissed. 14. Before us, since both the parties have admitted that the facts of the case in the present grounds are identical to that of earlier years and since in earlier years, the issue has been decided by Co-ordinate Bench of the Tribunal in assessee's favour, we therefore following the reasoning of the decision of the Co-ordinate Bench of the Tribunal in assessee's own case for earlier years and for similar reasons, allow the ground of assessee and thus the assessee's ground No.2 is allowed and Revenue's ground No.2 is dismissed." 22. From the above discussion and the arguments made out by the ld. Counsel for the assessee, we find the AS-7 which exi....
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....aim of prior period expenses in the past. For the sake of brevity, we are not reproducing the findings of the Tribunal for assessment year 2004-05. Thus, following the order of Tribunal in assessee's own case in ITA No.1765/PUN/2012 (supra.), the assessee's claim of "prior period expenses" is rejected. Thus, ground No.2 raised in appeal by the assessee is dismissed. 8.3 The Ground No.3 in appeal by the assessee relates to liquidated damages. The assessee has been claiming penalty paid to customers for delay in delivery of consignment as "liquidated damages". We find this issue is recurring in the past several assessment years. The Co-ordinate Bench in appeal of assessee for assessment year 2004-05 decided the issue in favour of the assessee by placing reliance on assessee's own case in ITA No.1055 & 1056/PUN/2009 for the assessment year 2003-04 decided on 12.03.2019 and concluded as under: "31. .......... From the above, it is evident that the Pune Bench of the Tribunal has decided this issue in favour of the assessee. Now, it is a settled law that such expenditure is allowable as business expenditure if it is incurred on the grounds of "commercial expediency". Commercial expe....
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....n chart, AO noticed that assessee had claimed depreciation at higher rate of 80% depreciation on plant Nos.4 and 8 and 11 wherein it was manufacturing shell type boilers and absorption cooling devices. It was Assessee's contention that these items of plant and machinery were used in the manufacture of renewable energy devises and therefore it was eligible for higher rate of depreciation of 80%. The submissions of the Assessee were not found acceptable to AO. AO was of the view that due to the type of equipments that were manufactured by the assessee with the aforesaid machines, the aforesaid machines per se did not qualify for higher depreciation as those machineries could be used for manufacturing of other types of machinery as well and that it cannot be said that the machineries were used wholly and exclusively for manufacturing the energy saving machineries. He accordingly held that Assessee was only eligible for normal depreciation of 25% on such machineries. He accordingly disallowed the claim of additional depreciation of Rs. 17,25,103/-. Aggrieved by the order of AO, assessee carried the matter before Ld CIT(A), who following the order of his predecessor for A.Y 2002-03, uph....
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....ch as 'solar' any renewal energy device being in the nature of an air / gas / fluid heating system will be covered by this entry. However, the crucial questions is if the products manufactured by the appellant are renewal energy devices as distinguished from energy saving devices which are covered by entry no.3(iii). During the course of the appeal proceedings, the appellant was asked to obtain and furnish certificate from experts to the effect that the multitherms, shellmax, fluidpacs and bi-drum boilers are in the nature of renewal energy devices. The appellant was also asked to submit copies of brochures, pamphlets as may be available with regard to the specifications and functioning of these products. The details / evidences thus called for have not been furnished. In the circumstances, I have to hold that the appellant has not been able to substantiate that these products are in the nature of renewal energy devices being air/gas/fluid heating systems. It is also clear from entry 3(xiii) that all the sub-items figuring in this entry, including sub-entry (r), have to be in the nature of renewal energy devices. The starting words viz. 'renewal energy devices being' qualify all th....
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....Nos. 1247 & 1248/PN/2005 decided the issue partly in favour of assessee by holding as under: "11. The fifth ground in appeal of the assessee is with respect to claim of 100% depreciation on plant and machinery. The Revenue has also impugned the findings of the Commissioner of Income Tax (Appeals) on this issue as ground No.2 in its appeal. 11.1 The assessee had claimed 100% depreciation on its plant and machinery in Plant No.3, Plant No.4, Plant No.8, Plant No.10 and Plant No.11. In the first appeal, the Commissioner of Income Tax (Appeals) accepted the contentions of the assessee in respect of all the plants except Plant No.11. The assessee has come in second appeal with respect to the claim of depreciation @ 100% in respect of item of Plant No.11. Whereas, the Revenue in its appeal has assailed the findings of the Commissioner of Income Ta the Commissioner of Income Tax (Appeals) in respect of all the plants except Plant No.11. 11.2 Similar claims were made by the assessee in respect of Plant No. 11 and the Revenue in respect of other plants (excluding Plant No. 11). The issue was decided by the Tribunal in assessee's own case for assessment years 1998-99 and 1999-2000 a....
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....claim depreciation @ 100% with respect to plant and machinery used in the manufacture of air / gas / fluid systems but is not eligible for 100% depreciation in respect of plant and machinery used in the manufacture of heat pumps. Thus the ground of assessee is partly allowed." 29. Before us, since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years, we therefore following the decision of the Co- ordinate Bench of the Tribunal in assessee's own case for A.Y 2002-03 and for similar reasons hold that assessee is eligible to claim depreciation @ 80% with respect to plant and machinery used Plant Nos.4 and 8 in the manufacture of air / gas / fluid systems but is not eligible for 100% depreciation in respect of plant and machinery used in the manufacture of heat pumps. Thus, the ground of assessee is partly allowed. From the above, it is evident that the claim of depreciation with respect to impugned Plant & Machinery is allowable protonto. Considering the commonness of the facts as well as the settled legal proposition, we are of the opinion that the Assessing Officer needs to be directed to follow the said order o....
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....n this issue in ITA No.1247 & 1248/PN/2005 for assessment years 2000-01 and 2001-02 decided on 30.06.2015 are as under: "7.2. After perusal of the order of Co-ordinate Bench dated 15.12.2014 in assessee's own case for assessment years 1998-99 and 1999-2000 we find that this issue has been decided in favour of the assessee. The findings of the Co-ordinate Bench on the issue are as under :- "12. In this context, relevant facts are that the assessee made a provision of Rs. 3,45,59,744/- on account of provision for warranty with respect to the products sold. Considering the opening balance of provision of Rs. 2,95,97,441/-the differential amount of provision amounting to Rs. 49,62,303/- was debited to the Profit & Loss Account of the year under consideration. The said provision was made by the assessee on account of the fact that it is under an obligation to provide warranty for a period of one to two years on the products sold by it on account of any manufacturing defect found later. In such a situation, assessee was obliged to replace the product or repair the product free of cost during the period of warranty. The Assessing Officer as well as the CIT(A) disallowed the deductio....
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....rofitability and growth of the company. Indeed, there was substantial improvement in the turnover as well as profit of the company after business strategy formulated by Mckinsey & Co., were implemented. Mere fact that the assessee has earned some enduring benefit from the strategies would not be decisive to determine the character of expenditure. It would be relevant to mention here that the assessee had hired services of Mckinsey & Co. to formulate strategy in the existing line of business of the assessee. The assessee had not diversified in the new line of business. Since consultancy and legal charges were paid for improvement in the existing line of business, the expenditure on payment of constants and legal fees charges are 'revenue in nature'. 13.2 The Hon'ble Madras High Court in the case of CIT Vs. Crompton Engg. Co. Ltd. (supra.) where the assessee had hired consultants with the intention to bring improvement in the business held that the expenditure incurred in obtaining report from consultants was 'revenue in nature'. The relevant extract of the aforesaid judgment is reproduced herein below: "5. In the circumstances of the case, the expenditure incurred by the assess....
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.... obtaining a report from the management consultant and paying the fees therefore, could not be regarded as capital expenditure as such report was not obtained as part of documentation packages, but was obtained in a contract covering comprehensive restructuring of the business involved. No new line of business was started on the strength of the report of the consultants. The report was not regarded as essential part for any new business that the assessee commenced thereafter. In the circumstances of the case, the expenditure incurred by the assessee, in obtaining that report was clearly an expenditure of the revenue in character." Hence, the first question of law is covered against the assessee (sic- revenue)." 13.4 The Hon'ble Delhi High Court in the case of Indo Rama Synthetics (I) Ltd. Vs. CIT (supra.) while dealing with the issue of consultancy fees paid to the consultants for carrying out detailed operational efficiency and profitability study has held that payments made to the professionals were on revenue account. One of the substantial question of law before the Hon'ble High Court was : "(2) Whether on the fact and in the circumstances of the case, the Tribunal erre....
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.... capital asset or enduring advantage in the capital field. The Tribunal, however, rejected this submission of the appellant on the ground that there was no written agreement between the appellant and M/s McKinsey & Co. based on which the Tribunal could have ascertained the scope of the study and that it was only in a situation where the assignment had actually been completed and put in practice that the Tribunal could have determined whether the said study, in fact, resulted in enhancing the productivity and profitability of the company. Since the assignment was, in fact, never completed and put into practice, the Tribunal came to the conclusion that the appellant had not been able to prove that the payment of consultancy fee was for enhancing productivity and profitability of the appellant company. The Tribunal, accordingly, concluded that the aforesaid expenditure in respect of consultancy fee paid to M/s McKinsey & Co. could not be treated as revenue expenditure. 17. This approach of the Tribunal is not correct in law. Interestingly, the Tribunal has accepted the fact that even when there was no formal written agreement with M/s McKinsey & Co., the report was submitted by the....
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....owable in the impugned assessment year. Thus, the assessee succeeds on ground No.8 of the appeal. 14. In the result, appeal of the assessee is partly allowed in the terms aforesaid. ITA No.1289/PUN/2013 (By Revenue) A.Y. 2005-06 15. In ground No.1 of the appeal, the Revenue has assailed the findings of the Commissioner of Income Tax (Appeals) on revenue recognition method. This ground of appeal by Revenue is corresponding to ground No.1 of appeal by the assessee. Since we have allowed assessee's claim in full, ground No.1 of the Revenue's appeal is dismissed. 16. In ground No.2 of the appeal, the Revenue has assailed the findings of Commissioner of Income Tax (Appeals) in partly allowing liquidated damages. The assessee in its appeal has raised this issue in restricting relief of liquidated damages. Since we have allowed assessee's claim with respect to liquidated damages in entirety in ground No.3 of appeal by the assessee, corresponding ground No.2 in appeal by the Revenue is liable to be dismissed. We hold accordingly. 17. In ground No.3 of appeal, the Revenue has assailed the deletion of ad-hoc disallowance of expenditures viz. miscellaneous expenses, vehicle expenses....
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....ncome earned. 18.1 The ground No.4 of appeal by the Revenue is corresponding to ground No.5 of the appeal by assessee. While adjudicating ground No.5 of appeal by assessee, we have upheld disallowance u/s. 14A of the Act @ 2.5% of the exempt income earned. As regards interest expenditure is concerned, the assessee has demonstrated that own funds of the assessee are much more than the investments made. It is a well settle law that where the assessee is having both, own funds and borrowed funds, it shall be presumed that investments have been made by assessee utilizing its own funds. Thus, in view of the settled law, we find no reason to interfere with the findings of the Commissioner of Income Tax (Appeal). Hence, ground No.4 of appeal by the Revenue is dismissed. 19. The ground No.5 of appeal by the Revenue is in respect of sales commission Rs. 13,45,000/-. The ld. AR submitted that the assessee has paid sales commission to M/s. MCC Resources, Kolkata amounting to Rs. 8,50,000/- and M/s. Ayushi Abhiyanta, Kolkata amounting to Rs. 4,95,000/-. The aforesaid two companies have been instrumentally in procuring orders for the assessee and thereafter, getting payments released from i....